1. Field of the Invention
The present invention relates generally to the management of financial accounts and more particularly, to a method, system and computer program product for managing funds in custodial deposit accounts.
2. Background Art
Through a custodial arrangement, deposit accounts may be established at one or more depository institutions by an agent and/or custodian on behalf of a plurality of customers. (Such deposit accounts are referred to herein as “omnibus” deposit accounts.) The agent and/or custodian responsible for establishing and holding such deposit accounts may be, for example, a broker-dealer registered under the Securities Exchange Act of 1934 as amended (referred to herein as a “broker-dealer”), another depository institution, a credit union, or another regulated financial institution. (Such agent and/or custodian is referred to herein as a “custodial agent”).
Custodial agents that are registered broker-dealers typically offer their customers various types of liquid investments into which customer “free credit balances,” as defined in Rule 15c3-3 adopted by the SEC pursuant to the Exchange Act, are automatically invested, or “swept,” from a customer's brokerage account. A free credit balance is created in a customer's brokerage account when the customer sells investments in the account the customer receives interest or dividend payments on investments in the account or the customer deposits funds in the account. As a service to their customers, broker-dealers can offer to automatically invest, or “sweep,” customers' free credit balances into liquid investments. If the customer then needs funds to settle securities transactions or for cash management activity, the broker-dealer withdraws funds to cover such transactions. An automated service that sweeps customers' end-of-day cash, for example, into an interest-bearing account affords customers an opportunity to receive interest on excess cash that would otherwise not earn interest.
Broker-dealers also commonly offer customers check-writing, debit card and other cash management features in connection with brokerage accounts. Debits in a customer's brokerage account created by check, debit card, purchases of securities or other transactions are typically satisfied from available cash balances, funds in the customer's sweep investment and, if applicable, margin credit. A sweep investment, therefore, may be offered to a broker-dealer's customers as part of a cash management component of a brokerage account.
Funds deposited in deposit accounts, in some banking systems around the world, are insured by government-run deposit insurance programs up to an established deposit insurance limit. In the United States, for example, such deposits are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC currently insures deposits up to $100,000 per depositor in any one insured depository institution for many insurable capacities (e.g., individual accounts and joint accounts) and up to $250,000 for IRAs and certain self-insured employee benefit plans. The basic deposit insurance limit was temporarily raised on Oct. 3, 2008 by the Emergency Economic Stabilization Act of 2008 from $100,000 to $250,000 per depositor. This increase is scheduled to end and return to $100,000 per depositor after Dec. 31, 2009.
One option for broker-dealers and other custodial agents is for the custodial agent to place customer funds in a plurality of depository institutions in amounts that do not exceed the deposit insurance limit for each customer at each depository institution, permitting customer funds to be eligible for insurance coverage in excess of the basic FDIC limit. A sweep arrangement in which customer funds are placed in deposit accounts at a plurality of depository institutions (a “multi-bank sweep arrangement”) can benefit participating depository institutions by providing a large, stable source of deposits. A multi-bank sweep arrangement can also benefit customers, by offering additional investment opportunities together with increased access to FDIC deposit insurance protection. Even without regard to FDIC deposit insurance protection, a multi-bank sweep arrangement can spread and thereby mitigate risk and can provide greater access to competitive returns.
Swept customer funds that are placed in deposit accounts at a plurality of depository institutions may be deposited in interest-bearing money market deposit accounts (“MMDAs”), however, such MMDAs are not transaction accounts. In the United States, for example, Regulation D of the Board of Governors of the Federal Reserve System (“Regulation D”) limits transfers from an MMDA to six per calendar month or other statement cycle. Accordingly, funds swept into MMDAs must be properly managed so that transfers from MMDAs are in compliance with transaction limits.
FDIC-insured sweep services have been in use by broker-dealers since at least the early 1980s, when Merrill Lynch offered a sweep option to its brokerage customers under which funds were swept into Omnibus MMDAs at multiple banks. Continuing through the 1990s, other broker-dealers offered similar services to their clients. Some such services sought to invoke the messenger exception of Regulation D, 12 C.F.R. §204.2(d)(2), to permit unlimited transfers from an Omnibus MMDA, but such an approach was contrary to Federal Reserve guidance. As a result, most such services either relied on transfer limitations at the Individual MMDA level or attempted other ways of overcoming the limitations, such as moving funds among banks. These services were frequently combined with other well-known features in the financial services industry, such as ATM cards, credit cards, checking, interest rate incentives, benefits for large depositors and preferred customers, and the like. None of the services operated as is described here, including limiting transfers from the Omnibus MMDA as well as the Individual MMDA (e.g., to six per month) through retaining portions of the deposited funds in Individual TAs to offset net transfers from the Omnibus MMDA that would otherwise occur.